commonsenseThe company property development is mainly focus in the Klang Valley area. Some of the projects that they currently developing are the mix development Kiara 163 with GDV of RM1bil (target completion 2020), Sfera Residensi in Puchong with GDV of RM426mil (target completion end of this year) and Menara YNH near the Golden Triangle area with GDV of RM2.1bil.

But the value in investing in the company lies in it vast land banks around the Klang Valley and Perak areas with most of them yet to be revalue since early 2000. It is safe to say that the NTA of RM1.74 per share recorded in Sept 18 is actually much higher ( most probably around RM3.00). As an example they have a 90 acre land near Genting that they had acquire in 2008. In their books the land is only valued at RM17.8mil but the company is planing for a mix development project with a GDV of RM2bil. At the current share price the company is only trading at 0.8x PB (if revaluation is done potentially this drops to only 0.5x PB). However, the unlocking of the asset value might take some time. Investors need to have a longer term investment horizon for this type of stock.

In the near term, the company currently facing falling revenue and profit which is in line with the general property industry.

Core PBT for 3Q18 would have only been RM4.8mil (instead of the reported RM13.8mil) if we were to exclude the RM3.4 mil gain in disposal and the RM5.6mil write back. For 9m18 property development division actually recorded a growth of 27% in revenue but this does not translate to higher profit. EBITDA and PBT for the same period has fallen by 10% and 15% respectively.

But the bigger issue lies on its balance sheet. The company is overly dependent on debt to fund their operations. As of Sept 18 the current liabilities of RM925mil (of which RM635mil is debt) is higher than the current asset of RM621mil ( of which only RM14mil is cash). The company might faces liquidity issue in the near future unless they can sell more of its assets to raise the cash to help settle their immediate obligation. Their cash flow statement in 3Q18 did not provide details but since there was a gain on disposal, they might have already started to sell some of the assets already.

The dependence on debt might also effect their future profit margin given the expected higher interest rate trend . 9m18 interest cost is RM29mil or 54% of EBIT.

Hopefully management can provide more clarification on how they plan to strengthen their balance sheet position. As mentioned before, given the landbank that they have at the moment (the list of properties under the company has 11 pages in FY17 annual report), the company has immense potential to create more value to the shareholder either by selling the land or developing it in the future.

If you are looking to diversify your portfolio outside of the property industry (due to the current negative sentiment), i would recommend you to look at MBMR.

MBMR is a direct proxy to Perodua via its 22.6% interest in the company. Valuation is cheap at only 5.8x PE (based on target FY18 PATAMI of RM145mil. 9m PATAMI is already RM106mil). PB is low at only 0.6x BV. 4Q18 results is expected to be higher than 3Q18 and last year's 4Q17. For FY19 growth will be driven by the still high demand of new Myvi and the launch of the new SUV in 1Q19.

Please go through the analyst reports (https://klse.i3investor.com/servlets/stk/pt/5983.jsp) and do your own analysis before making any decisions.